Cyprus
works its way towards eu membership and WTO conformity Back to top

Cyprus' trade policy is
determined by two major goals: harmonizing its laws and policies with those of the EU, and
ensuring the conformity of these laws and policies with the WTO Agreements. Salient
features of Cyprus are the openness of its economy and the growing importance of its
services sector, notes a new WTO Secretariat report on Cyprus' trade policies and
practices.

The WTO's report and one
prepared by the Government of Cyprus will be the subject of two days of discussion on 25
and 26 June 1997. Services, the report notes, account today in Cyprus for 70 per cent of
both GDP and foreign exchange receipts. In the last decade, tourism and more recently
business services for a booming offshore sector have become the main contributors to
economic growth. As a result, Cyprus' per capita income has tripled from $4,570 in 1985 to
around $13,650 in 1996. Tourism generates 40 per cent of current account receipt and more
than 20 per cent of GDP. Led by tourism, services export earnings were nearly $3 billion
in 1995, compared to $1.2 billion from merchandise exports.

According to the report,
Cyprus suffers from a structural trade deficit. Merchandise imports represent nearly 40
per cent of GDP, outweighing exports by a factor of almost three. Although different sorts
of export incentives exist, Cyprus is a net importer of manufactures. In 1996, merchandise
exports amounted to $1.4 billion, imports were $3.9 billion and the current account
deficit widened to 5 per cent of GDP.

Even though the share of
Cyprus' exports to the EU has fallen in the last five years, the European Union is still
Cyprus' most important trading partner. Cyprus has applied for EU membership and is
harmonizing its laws, policies and institutional structure with the EU's "acquis
communautaire". Cyprus already meets the Maastricht "convergence" criteria:
inflation is low, the fiscal deficit stood at 2.9 per cent in 1996 and its public debt was
reduced to 54 per cent of GDP in 1995. On the basis of the existing Customs Union
Agreement, Cyprus will adopt the EU's CommonCustoms Tariff by the end of 1997. The process
of harmonization of Cypriot standards with those of the EU was completed recently. Cyprus
has adopted EC legislation on competition policy and is liberalizing its financial sector
according to EU requirements. Cyprus has entered specific commitments on professional and
financial services in GATS by which it generally accords national treatment. While
financial and insurance services are open to foreign service suppliers, the
telecommunications services sector is still controlled by a government monopoly.

The WTO report states that
Cyprus, in order to conform with Uruguay Round commitments, abolished its discretionary
import licensing and is in the process of revising its anti-dumping and countervailing
legislation. It introduced a new foreign direct investment policy in 1997 and has made
efforts to improve competition on the local market. Most price controls, for example, have
been removed. A draft law on public procurement is with the legislature. The Government
estimates that roughly 95 per cent of procurement is executed through competitive
tendering.

In 1996, the average applied
m.f.n. tariff was 16.4 per cent (7.2 per cent for the EU, a preferential supplier). In the
same year, the Secretariat report notes, Cyprus' simple average m.f.n. tariff on
agricultural products was 37.6 per cent while the preferential tariff, applicable to EU
imports, stood at 23.3 per cent but there is a wide dispersion of m.f.n. tariffs. Close to
half of agricultural tariff lines carry a compound or specific duty. Thus fruits,
vegetables and tobacco carry average rates above 60 per cent. Exports subsidies of $17.5
million on agricultural products (mainly for vegetables, fruits and wine) will be
progressively reduced by 24 per cent by 2004. For certain crops, semi-governmental
organizations are the sole buyers and sellers. For example, the Cyprus Grain Commission is
the sole importer of grains and the Vine Products Commission is the sole buyer of grapes.
Cyprus' agriculture accounts for 5.5 per cent of GDP.

In its conclusions the
report suggests that Cyprus could take further steps to conform with multilateral rules.
Currently, Cyprus uses many non ad valorem duties which reduces the level of transparency
in its import tariffs and still resorts to measures such as reduced tax rates for export
manufacturing or preferential treatment for domestic content. The report suggests that
because tariff quotas on certain farm products are underutilized, tariffs in these areas
could be lowered with little effect on imports.

Note to Editors:

The WTO Secretariat's
report, together with a report prepared by Cyprus will be discussed by the WTO Trade
Policy Review Body (TPRB) on 25 and 26 June 1997. The WTO's TPRB conducts a collective
evaluation of the full range of trade policies practices of each WTO member at regular
periodic intervals and monitors significant trends and developments which may have an
impact on the global trading system. The two reports, together with a report of the TPRB's
discussion and of the Chairman's summing up, will be published in due course as the
complete Trade Policy Review of Cyprus and will be available from the WTO Secretariat,
Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

The reports cover the
development of all aspects of Cyprus' trade policies, including domestic laws and
regulations, the institutional framework, trade policies by measure and by sector. Since
the WTO came into force, the "new areas" of services trade and trade-related
aspects of intellectual property rights are also covered. Attached are the summary
observations from the Secretariat and government reports. Full reports will be available
for journalists from the WTO Secretariat on request.

21. In the Uruguay Round, Cyprus
offered ceiling bindings of between 30 and 245 per cent on
agricultural products (adopting tariff equivalents at least as high as those used by
the EU), after converting the specific duties from ECUs to Cyprus pounds. Close to half
of agricultural tariff lines carry a mixed, specific or compound duty. Based on ad
valorem rates, in 1996, Cyprus' simple average m.f.n. tariff on
agricultural products was 37.6 per cent; the preferential tariff,
applicable to EU imports, stood at 23.3 per cent. There is considerable
dispersion of m.f.n. rates by product groups in the farm sector; fruits, vegetables
and tobacco carry average rates above 60 per cent; seasonal tariffs apply to
various fruits, vegetables, cut flowers and fish.

22. From 1 January 1996,
Cyprus tariffied all its quantitative restrictions on agricultural products,
following protracted negotiations with the EU, except for groundnuts, which are subject to
licensing. Notified as a trade-related investment measures, importers are required to
purchase predetermined quantities of locally grown groundnuts before they are allowed to
import.

23. In the Uruguay Round, Cyprus
agreed to reduce levels of domestic support on agricultural products to
úC 50.6 million by 2004. The total aggregate measure of support (AMS) in 1995
amounted to úC 36.5 million, representing about one-sixth of agricultural value
added. Cyprus is adopting many of the provisions of the EU Common Agricultural
Policy and has changed the base for subsidies from production to area cultivated.
Cyprus was one of the few developing countries to make commitments to reduce export
subsidies; export subsidies of approximately úC 9 million (mainly for
vegetables, fruit and wine) will be reduced progressively by 24 per cent by
2004.

24. For certain crops,
semi-governmental organizations are the sole buyers and sellers. The main
objectives of these organizations are to facilitate product marketing and
stabilize producer returns. The Cyprus Grain Commission, the sole importer
of grains, and the Vine Products Commission, sole buyer of grapes, are directly
financed by the Government; the Grain Commission operates a price support
scheme for grain producers and sells grain at lower than world prices to
subsidize animal feed and the livestock sector. Membership of the marketing boards
responsible for exports is compulsory for producers. In addition to the
semi-government organizations, cooperative organizations participate actively in both
local and export sales of farm produce. A policy to reduce and stabilize beef and
milk production has recently been introduced.

(ii) Manufacturing

25. Manufacturing, primarily food
and clothing, accounts for 12 per cent of GDP. Cyprus is a significant net importer of
manufactures. During the Uruguay Round, Cyprus bound approximately 80 per cent of its
industrial tariff lines at 40 per cent; clothing, footwear and motor vehicles remain
unbound. Applied rates are considerably lower; in 1996, the average m.f.n. tariff on
industrial products was 10.9 per cent and 3 per cent on imports from the EU.

26. The Government has shifted its
industrial development focus to diversification and the fostering of specialization
through technological upgrading; investment incentives for machinery and equipment have
been introduced. Past high import protection allowed local consumer industries to supply
the domestic market. As protective barriers have been lowered, demand has begun to switch
to imports and increased competition from customs union with the EU will bring further
adjustment pressures.

(iii) Services

27. Receipts from services
transactions far exceed merchandise exports; led by tourism, services earnings were nearly
US$3 billion in 1995, compared to US$1.2 billion from merchandise exports. In the GATS
negotiations, Cyprus made specific commitments on professional and financial services; it
generally accords national treatment.

28. Tourism generates 40 per cent of
current account receipts and more than 20 per cent of GDP. Like other service sectors,
certain investment projects in tourism have been opened to majority control by
non-residents; however, the ceiling on foreign equity in tour operations and travel and
car rental agencies in subject to a 49 per cent limit.

29. Financial liberalization is one
of the cornerstones of policy reform towards harmonization of Cyprus' institutional
framework with the EU. Financial supervision of institutions is being strengthened through
legislation; money laundering is a criminal offense and surveillance measures are in
place. Licensing requirements for foreign banks are the same as for domestic banks.
Foreign banks may establish both branches and subsidiaries and no distinction is made
between domestic and foreign banks in terms of the services they may provide, or on their
source of funds. Policy towards the granting of banking licences, determined by the
Central Bank in consultation with the Ministry of Finance, aims to provide a range of
services while maintaining the soundness of the banking system. Concentration in the
commercial banking sector is high; two banks control two-thirds of total deposits.

30. Cyprus made commitments,
according national treatment, in both the life and non-life insurance sectors during the
Uruguay Round negotiations. All forms of insurance activities are open to foreign
suppliers; 100 per cent foreign equity is permitted under the new investment
regime.

31. Cyprus maintains the world's
fourth largest open registry. Vessels flying the national flag must be majority-owned by
Cypriots; incentives to register ships in Cyprus include low registration fees and a
completely tax-free status for shipping companies. This includes exemption from tax on
profits and dividends, capital gains tax on sale of ship or shares, income tax on crew
wages, stamp duty on deeds and estate duty. Domestic shipping companies are eligible for
preferential tax treatment through a 30 per cent reduction of the annual tonnage tax
if the ships are operated by a Cypriot ship management company. Cyprus limits cabotage,
inland trucking and port services to nationals, although the authorities may approve
foreign participation up to 49 per cent on a case by case basis. The state-controlled
Cyprus Port Authority is the monopoly provider of a number of port services, pilotage,
towing, navigation aids, and berthing; provisioning, fuelling and emergency repair
services are provided by the private sector, subject to approval by the Cyprus Port
Authority.

32. The provision of
telecommunications services in Cyprus is currently under a government-controlled monopoly.
The Cyprus Telecommunications Authority has sole responsibility for the installation,
operation and maintenance of telecommunications networks as well as for the provision of
all telecommunications services. Tariffs for telecommunications services must be approved
by the House of Representatives; a system to facilitate cost-oriented pricing is being
developed. The Authority performs type approval functions, but withdrew from the sale of
terminal equipment several years ago.

(5) Cyprus and the Multilateral
Trading System

33. Cyprus' trade policy is
determined by its twin goals of harmonizing laws and policies with those of the EU and
ensuring conformity with WTO Agreements. The entry into force of the WTO has precipitated
the removal of quantitative restrictions and allowed for greater predictability,
particularly with the binding of the majority of tariffs. While Cyprus will adopt the EU's
Common Customs Tariff at the end of this year, the frequency of specific, or other non ad
valorem duties, detracts from transparency. The excise duty on cigarrettes may need to be
reviewed for conformity with national treatment. Measures, such as temporary emergency
protection in the form of surcharges for certain products, reduced tax rates for export
manufacturing, certain preferential treatment for domestic content, suggest further steps
may be necessary to conform with multilateral rules. Underutilization of tariff quotas on
certain farm products suggests that tariffs in these areas could be lowered with little
effect on imports. Subsidies to state-trading organizations in the agricultural sector
pose a burden, particularly as the Government is determined on achieving a comfortable
fiscal balance.

34. Efforts to improve local
conditions for competition seem to be bearing fruit, as evidenced, inter alia, by the
removal of most price controls and the implementation of competition legislation. State
monopolies still exist in certain sectors, including air transport, telecommunications and
port services. Red tape has been reduced and the investment regime liberalized; many
sectors of the economy have now been opened to majority foreign control. Prospective
removal of the interest rate ceiling and remaining restrictions on capital movements will
liberalize financial markets. The offshore business sector and shipping as well as transit
trade services continue to provide an important source of growth to the increasingly
service-oriented economy.

48. Cyprus' Trade Policy activities over the past two years
have focused particularly on implementing the Uruguay Round Agreements and coordinated
efforts to harmonize with the Acquis Communautaire, with a view to prepare the smooth
integration of Cyprus in the United Europe.

49. These initiatives include developments in the following areas:

(i) Discretionary import licensing, to protect local production, was
abolished, along with remaining quantitative restrictions, with effect from 1 January
1996; tariffs are now the main instrument of the import regime. Surcharges, incorporated
in the customs duty, have replaced quotas on certain products, defined as sensitive within
the terms of the Customs Union Agreement with the EU. During the Uruguay Round, Cyprus
bound approximately 80 per cent of industrial tariff lines at 40 per cent, and all
agricultural tariff lines are bound.

(ii) Implementation of WTO Agreements.

(iii) Reductions in tariffs and tariff simplification.

(iv) Elimination of Quantitative Restrictions and Quotas.

(v) Application of the provisions of the WTO Agreement on Sanitary and
Phytosanitary Measures (SPS).

(vi) Competition policy to consolidate existing legislative framework and
to make it comparable to the EU regulatory framework.

(vii) Price controls on locally produced and imported consumable goods
were reduced to a limited number of goods.

50. The period since the issuing of the Avis by the
European Commission regarding the application of Cyprus for full membership to the
European Union, in June 1993, is characterized by the coordinated and systematic efforts
on the part of Cyprus to harmonize with the Acquis Communautaire, with a view to prepare
the smooth integration of Cyprus in the EU.

51. The decision of the Council of Ministers on 6 March 1995 for the start
of the accession negotiations with Cyprus six months after the completion of the
Intergovernmental Conference, in conjunction with the subsequent confirmation of this
decision in all meetings of the European Council which followed, indicates the importance
attached by the EU to a balanced expansion to the south. The shaping of the new
Euro-Mediterranean Partnership enhances even more the role which could be played by Cyprus
as a future member of the EU for the successful promotion of this desired cooperation.

52. The accession course of Cyprus and other candidate members is closely
associated with important developments in the EU in 1996, particularly the inauguration of
the sessions of the Intergovernmental Conference, aiming at revising the Treaty of
Maastricht.

PLANNED ACTION FOR THE PROMOTION OF ACCESSION

53. Following the issue of the Avis by the European Commission on the
application of Cyprus for full membership, the efforts for harmonisation and adjustment to
the Acquis Communautaire constitute a priority for Government policy. Both the Strategic
Development Plan 1994-98 and the Fourth Financial Protocol between Cyprus and the EU,
covering the same period, are concentrated on the achievement of this goal.

54. As from 1994, 22 working groups were set up with a view to study in
detail the Acquis Communautaire in relation to the practices in Cyprus, identify
possible divergences and prepare a plan of action for harmonisation. The reports of the
working groups were presented to the Ministerial Committee on EU matters. These
proceedings made clear that a sectoral approach on its own was not sufficient to satisfy
the set targets, and that a synthesis of the partial conclusions and suggestions was
necessary within a unified plan of action covering all sectors of economic and social
activity.

55. Under this unified action plan the Government of Cyprus will undertake
sectoral and intrasectoral comparison and analysis and will proceed to an evaluation,
priority ranking and classification of the proposed measures, according to the expected
impact on the economy. The basic objective of the harmonisation programme will be the
achievement of the greatest possible degree of preparation for accession, with a
minimization of the potential adverse repercussions.